MONEY: Are Diamonds Anyone's Best Friend?

The diamond ring we had inherited was too small for my hand, so I stuffed it quickly in the sock drawer, a little nervous that we finally had something worth burgling.

When real anxiety set in, my husband and I decided to add the ring to our homeowners insurance policy. This meant getting it appraised first. For $39.50 (1 percent of the appraised value), we learned that the ring was worth $3,950. Anxiety turned to fantasy.

Although the appraiser said that in practical terms we couldn't expect to sell it for more than $1,500 or $2,000 (insurance appraisals indicate replacement value, not true-market value), we began imagining a winter vacation, a down payment on a new car, a big payment on our Visa bill. We "spent" the money in a dozen different ways, added the ring to our insurance and got a swift blow to the budget in return: Our insurance now would cost $79 a year more.

Happy to be $2,000 richer (less insurance and appraisal fees), we put off selling the diamond, out of ignorance of how to go about it. Then, as insurance-premium time rolled around again, we put out our first feeler, taking the ring to a store that advertised, "WE BUY DIAMONDS, HIGHEST PRICES PAID." What, we asked, would they give us for the diamond? Answer: $300.

THREE HUNDRED DOLLARS? For a ring appraised at nearly $4,000?

And then we learned that the pretty little ring that was going to send us to Tahiti, or put us into a Honda wasn't quite up to snuff in the four qualities diamond dealers pay attention to: carat weight, color, clarity and cut.

Although our diamond weighed about 1 carat (or 200 milligrams), it was badly chipped (did you know diamonds chip?) and would have to be re-cut. Estimates on the resulting weight loss varied from 20 to 40 percent, depending on the dealer. The color, H-I, was "acceptable" on a scale that goes from D to Z, with D being colorless, and therefore most attractive. The imperfections, however, were noticeable to the naked eye. The cut was out of style--an old-fashioned "mine" cut, flat, rectangular and sweet-looking--compared with the round 58-faceted "brilliant" cut now popular.

As if that were not enough, diamond prices had fallen 60 to 70 percent since the appraisal was made. Indeed, writer Edward Jay Epstein was predicting a total collapse of the diamond market (see box).

Our fantasy bubble had burst. For this we were paying an extra $79 on our insurance?

We took the ring to 15 stores, many of which--including the store that had appraised it--showed no interest at all. We got offers ranging from $100 to a tenative $800, which later came down to $750 when the store owner had his gemologist examine it.

Jewelers in two of the stores "not interested" in the ring made offers on the side of $400 and $500.

Several dealers told us that we might be able to sell it for more on our own. But we ruled out this option after calling 20 people who had advertised their diamonds. Only two had sold their stones, and one was an amateur gemologist who told us that the $750 offer was probably about as good as we would get. (He also told us that colored gems--rubies, emeralds, sapphires and colored diamonds--are better investments because they are naturally rare, whereas white diamonds are now rather common.)

Another fellow had received $300 for a brand-new $600 ring he wanted to get rid of because his fiance' had walked out on him. Like most of the people who sell jewels through the classifieds, he met his prospective customer in a public place so as not to attract thieves to his home. He and the fellow who bought the ring got drunk together and cursed the faithlessness of women.

One woman was trying to sell her ring to make her first payment in a real-estate deal. She was furious because a downtown dealer had offered her only $750 for the ring, which had been appraised at $10,000.

Along the way, we learned a few home truths about selling diamonds:

* Unless you are in the diamond business, diamonds are not an investment, particularly at the engagement-ring level. Most of us must buy at retail prices and sell at wholesale or below. Retail prices reflect a mark-up of 100 percent or more.

* Appraisals for insurance purposes give retail value, plus 10 to 15 percent to allow for rising prices. To calculate what you would get on the open market, you knock off half the appraisal and then perhaps another 30 percent, according to one dealer who gave us a pretty good bid.

* The diamond probably would have been worth more to us if it had been stolen.

* From the owner of one of the most respected jewelry stores on Connecticut Avenue: "I generally tell people that they should be able to get one-fourth to one-half of appraisal value, but that's not fixed in stone. Basically what you can get is what someone will offer you. As for buying diamonds as an investment, I see diamonds as toys for adults, like clothes or an Atari. You should buy them because you like them. If you want to invest, go to a stockbroker."

For us, diamonds were more of a headache than a toy, and in the end we sold our ring to the store that offered $750--and bought a new king-sized bed with the proceeds.